Public pension reform gains ground

Mon Jul 16, 2012 7:59 pm EDT (Reuters) — Pennsylvania is joining a growing movement across U.S. states to overhaul public pensions, but even while the state’s governor says the need for reform is urgent, he advocates action only after great deliberation.

Pennsylvania, like so many other U.S. states, is facing a yawning gap in its public pension fund, and Governor Tom Corbett acknowledges that finding ways to close that gap won’t be easy.

“It’s going to be a working summer to start coming up with some recommendations, because I don’t think there is a silver bullet to this,” Corbett, a Republican said last Friday at a National Governors Association meeting. “If there was, everybody would be doing it.”

Corbett would not describe what he is considering to close Pennsylvania’s public pension gap, estimated at $29 billion in 2010 by Pew Center on the States. “I’m not going to speculate on anything we’re going to do until I have all the facts and we talk to the legislature,” he said.

The shortfall is exacerbating other budget problems at a time when Pennsylvania is not only confronting its own financial woes, but also those of many local governments, he said, adding that the cities, too, will have to look at reforming their pensions.

No panacea

Like many other states, Pennsylvania neglected to pay the full amount that actuaries recommended it put into its retirement system from 2005 to 2010, according to Pew.

The recession hurt states’ revenue, and many have not been making full payments to their pension funds. The economic downturn also sliced into many pension funds’ assets.

That has left major shortfalls. Pew estimated the total pension gap for states at $757 billion in 2010, while the Urban Institute said it was $2.7 trillion.

A new institute report also suggests that the nation’s state public pension plan reforms are likely to leave younger employees footing the bill for unfunded liabilities. It spotlighted New Jersey, which it said has trimmed pension benefits for new hires five times since 2007.

“There is no perfect pension instrument,” according to the report, which advises states to consider a combination of the best features of both defined benefit and defined contribution plans used more frequently in the private sector.

Public pensions have continued to hew to the time-honored defined benefit plans that were also once common in the private sector, though some states are now looking at turning to defined contribution plans.

Most governors now say they must reform pensions, or risk pulling dollars from other vital areas and public services to pay benefits. According to the National Conference of State Legislatures, from 2009 to 2011, 43 states made changes to their systems.

Some public employees say they are being blamed for states’ poor spending decisions and are being cheated out of money they were promised in good faith. In some states public workers do not receive Social Security, making retirees fully reliant on pension benefits that average about $19,000 a year.

In Delaware, Governor Jack Markell, a Democrat, minces no words on how the state’s reforms passed two years ago affect public employees: They “pay more, work longer, get less.”

Although Delaware’s retirement system was in better shape than most, Markell was worried about an increasing demand for taxpayer contributions. He met with businesses, legislators and employees to find a compromise.

Corbett could choose to follow his lead – Markell notes the changes in Delaware did not inspire the protests or political strife seen in places such as Wisconsin, where the measures included curbing the collective bargaining power of public sector unions.

Pew estimates Delaware’s gap in 2010 was $633 million, and likely shrinking. At the time, the state had enough assets on hand to cover 92% of benefit costs.

Nearby Maryland took dramatic steps last year to close a gap Pew pegged at $20 billion in 2010, the latest year for which data is available. At the conference, Governor Martin O'Malley, a Democrat, said the reforms went far.

“We made a lot of big changes last year in terms of employer contributions, employee contributions, length of service, benefits – the whole gamut,” he said. “So, we’re not planning any more changes at this time.”

Another neighbor, Virginia, recently began requiring public employees to put money into the retirement system while also giving them a commensurate raise. Corbett refused to say if Pennsylvania is considering a similar approach.

Nowhere are pension problems more pressing than Illinois, which has an $83 billion gap. The state’s changes a few years ago only applied to future employees and do not impact current funding problems. The Illinois legislature is looking at Governor Pat Quinn’s proposal to essentially have current and retired workers choose between a cut in cost-of-living increases for their retirement payments and health insurance.

“We spent June and now July studying some specific issues that leaders or individual members wanted to look at,” Quinn said, adding that he hopes the reforms will pass before the start of the school year in late August. “The bottom line is this is the moment of truth for our state when it comes to pension reform.”